By The Washington Post

Published: Friday, October 12, 2012, 9:36 p.m.
Updated: Friday, October 12, 2012

When Bank of America agreed in December to pay $335 million to resolve federal charges that its mortgage-lending arm discriminated against black and Hispanic borrowers, government officials hailed it as the largest fair-lending settlement in history.

But, in fact, the banking giant has the right to a substantial discount on the payout. Nearly 40 percent of the settlement is deductible. That means Bank of America could wind up saving $117 million on its tax bill.

Over the past year, federal prosecutors and regulators have lauded a series of multi-million dollar settlements against big corporations that have done everything from duping customers into buying unneeded products to foreclosing on active duty troops. But little mentioned is a tax law that takes these firms off the hook for a huge chunk of that money.

Corporations can write off any portion of a settlement that is not paid directly to the government as a penalty or fine for violation of the law. A majority of the settlements that federal regulators announced in the past year include some form of restitution that is eligible for a tax deduction.

That means Wells Fargo could claim its $175 million fair-lending settlement with the Department of Justice as a deductible corporate expense. Or Capital One could write off a portion of the $210 million agreement it reached in July with the Consumer Financial Protection Bureau (CFPB). And American Express can save millions on the $112.5 million settlement it negotiated last week.

“No corporation should ever save money by violating the rules that are in place to protect people,” said Virginia Robnett, outreach coordinator at OMB Watch, a government watchdog group. “These tax write-offs should be rescinded.”

Consumer advocates say the deduction is a slap in the face to taxpayers who are ultimately left on the hook for corporate misdeeds. But tax experts and corporate attorneys argue that preventing companies from writing off these expenses could encourage firms to forego settlements.

“If you were to disallow deductions for settlements, then that would create an incentive for companies to litigate the case all the way to a trial verdict,” Victor Fleischer, a tax law professor at the University of Colorado, said. “If the company had to pay a claim in that instance, it would be deductible. That's not wise public policy either.”

Officials at the Justice Department, the CFPB and the Federal Deposit Insurance Corp. declined to comment.

It is not yet known whether any of the firms involved in recent federal settlements will take advantage of the deduction, as they are months away from filing 2012 taxes.

Few corporations have ever passed up the deduction, and those who have did so under intense public scrutiny, analysts say. Take Boeing, which in 2006 abandoned plans to deduct a $615 million settlement with the Justice Department after several senators raised objections.

Four years later, Goldman Sachs agreed to waive tax deductions it could have claimed in a $550 million settlement with the Securities and Exchange Commission. The agency specifically placed language in the agreement to prevent the investment bank from receiving a tax break. Goldman, which gave up as much as $187.5 million in savings, could have contested the arrangement, but backed down.

“It was pretty unusual,” said Robert Willens, an expert on tax accounting. “But there has been a backlash through the years about companies financing their penalty payments on the backs of taxpayers.”

Lawmakers have routinely raised concerns over companies being able to deduct large civil settlement payments.

“Our tax laws ought to measure tax income. And once we start to depart from the measure of income to pursue social goals, then a variety of complications arise in where do you draw the line,” said Steven Rosenthal, a visiting fellow at the nonpartisan Urban-Brookings Tax Policy Center.

To offset tax deductions on damages, Rosenthal said government agencies could impose higher fines or penalties that cannot be deducted.

Fleischer said increasing penalties would serve as a more effective deterrent .

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